The Federal Reserve Chairman, Jerome Powell said digital innovation in the financial sector is here to stay and with it, new regulations will be needed.
In Brief:
- The Federal Reserve is still in talks with other central banks on CBDCs, discussing ‘issues’ in international payments.
- Powell also said that DeFi and distributed ledger have potential to improve payment systems.
- He said that user’s privacy must be ensured with CBDCs while also protecting against money laundering and other illegal activities.
Speaking on a panel at the Bank of International Settlements on central bank digital currencies, Powell said, “Novel technology like distributed ledger and decentralized finance have the potential to improve efficiency of the payment system and encourage a more competitive financial landscape”.
The Federal Reserve is yet to make a decision on Central Bank Digital Currencies(CBDC), Powell revealed. However, the organization is still cooperating with other central banks on CBDCs, discussing ‘issues’ in international payments, and finding a general agreement on some rules.
Moreover, the Reserve may also collaborate with other central banks on subjects of cryptocurrency and financial innovation, including stablecoins. It is worth noting that as per the chief, financial regulations haven’t been built for cryptocurrencies and CBDCs. So changes in the regulations will be needed.
Hinting at the ‘potential financial stability concerns’, Powell stated, “In particular, we don’t know how some digital products will behave in times of market stress, which could lead to large destabilizing flows, nor do we know how stresses in crypto markets could potentially spill over into the traditional finance system.”
Pwell’s statements can be seen as an iteration of doubts and queries citing which President Joe Biden recently signed an Executive Order to watch over cryptocurrency that directs the Federal Reserve to examine the crypto space.
Powell emphasized ensuring users’ privacy with the CBDCs while also protecting against money laundering and other illegal activities. A CBDC must be integrated into the private sector and leverage the private sector’s innovations.
The Chief also said that CBDCs must be a widely accessible payment for a seamless transactional experience.
“This order … will complement the Fed’s ongoing work with CBDC,” Powell said. “It doesn’t focus on any particular aspect, but tries to take a holistic look at the digital financial landscape. That is very welcome.”
